Published 4:00 am, Tuesday, August 27, 2002

Some potential suitors for Hershey, which put itself up for sale last month despite a storm of protest from local officials and employees, appear to be balking at the company's high asking price and the controversy surrounding the auction.

Cadbury Schweppes has already told Hershey that it will probably not submit an offer, according to executives close to the discussions. Nestle and Kraft Foods, the two most interested remaining bidders, are wavering about whether they can afford to meet Hershey's asking price -- more than $11 billion -- without significantly diluting their earnings, the executives said.

Some board members of the trust that controls Hershey are reconsidering the auction, too. Without a lucrative sale price, some board members have begun privately discussing possibly ending the auction and buying back stock instead.

Indeed, according to one board member, the political controversy could offer an excuse for the trust to halt the auction without having to publicly acknowledge that it could not draw the asking price.

Besides opposition from officials and employees, Hershey's sale is also being complicated by a rival auction that has not even begun yet.

Pfizer plans to put its Adams confectionary unit, which makes Trident, Dentyne, Certs and Halls, up for sale this fall, hoping to receive bids from many of the same potential buyers of Hershey, executives close to the company said.

Adams could bring $4 billion or more, so some suitors are considering whether to bid for Hershey now or wait to try to buy Adams. "We only have so much gun power," said an executive close to one company contemplating the options. "We've got to decide which is the right shot."

Pfizer had hoped to begin its auction this summer but decided to wait until after Hershey completed its sale. Indeed, Pfizer's Adams unit briefly considered bidding for Hershey but decided the price was too high and that such a deal would complicate selling itself later, executives close to Pfizer said.

Analysts said Cadbury might be holding back on a bid for Hershey so it can pursue Adams. Meanwhile, Nestle and Kraft Foods, a unit of Philip Morris, continue to negotiate with Hershey, according to the executives, although both have lowered their valuations of Hershey after reviewing its books during the past several weeks.

Executives close to Nestle and Kraft said that the economics of a deal for Hershey work only if it is valued at $10 billion or less. USA Today reported Monday that Nestle had made an $11.5 billion offer for Hershey, but a spokesman for Nestle called the report a "market fantasy." Shares of Hershey surged $1.77 on the report, to $76.80.

To be sure, the potential suitors for Hershey and Adams may just be posturing, hoping to reach a deal with a lower price. But one member of Hershey's controlling trust recently questioned whether a sale would happen at all.

"The board is not committed to sell," William Alexander, a board member, wrote in a letter to a friend that became public last week. "It is only one of several options being explored," he wrote, adding, "Once and for all we are going to find out if anyone exists who will pay a sufficient premium to justify a sale."

In the letter, Alexander wrote, "My best guess is that the supposed premium for control will be offset by discounts for the Kit Kat license and the social constraints." Under the licensing agreement that Hershey has with Nestle to sell its Kit Kat and Rolo brands in North America, those rights could revert back to Nestle even if Hershey is sold to another company, cutting into Hershey's asking price.

Of course, the social constraints that Alexander referred to are the huge amount of political jockeying in Hershey, Pa., to prevent a deal. On Friday, Mike Fisher, the Republican attorney general now running for governor, filed a motion with the Orphan's Court of Pennsylvania, which has jurisdiction over the state's charitable trusts, to issue a temporary restraining order to block the sale of Hershey.

"We think it's time the court put a halt to this sale," Fisher said in a written statement. "We are concerned about the speed in which the Hershey Trust seems to be moving forward with their plans."

Attorneys for the trust responded Monday, arguing in court that the attorney general's office overstepped its legal bounds in trying to block a sale.

In a motion asking that the attorney general's petition be dismissed, attorneys for Hershey Trust Co. said the trust has the legal right to sell the company. Granting Fisher's request for a temporary injunction against a sale could cause "gross and severe harm and injury" to the process of exploring a sale, the attorneys said, and could send the stock price into a tailspin, damaging shareholders.

Only after the sale is approved by the board of the trust company and that of the school it funds can the attorney general's office seek a review of the sale in court, trust and school attorneys said.

Fisher's spokesman, Sean Connolly, said the office will respond in court.

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